Expansion Of Extrapolation Belief,differences In Macroeconomic Environment And Capital Asset Pricing

China’s domestic capital market started in the 1990 s.After 30 years of rapid development,it has gradually changed from closed to limited open.The domestic capital account management system makes the capital asset pricing theory established based on the West’s fully open capital market environment not fully applicable in the domestic capital market.Under the trilemma,China chooses to abandon the completely free flow of capital to obtain monetary policy independence and exchange rate stability.Capital account management is an important institutional reason for restricting capital outflows,strengthening the influence of monetary policy,and improving the valuation of domestic assets.The differences in the macroeconomic environment brought about by the institutional differences with overseas capital markets have created new pricing factors in the domestic capital market,and the existing pricing factors’ ability to explain domestic asset prices is also different from that of fully open Western capital markets.At present,from the stock price performance of dual-listed companies in different capital markets,it can be found that their valuations in China’s domestic capital market are significantly higher than those abroad.As China gradually opens up some H-share investment channels to investors in the domestic capital market and foreign investors open up A-share investment channels,the homogeneous asset premium represented by the price difference of AH shares has not disappeared but has risen in stages.Moreover,from the research on the dynamic correlation between the valuation of a single market,the fluctuation of macroeconomic variables,and the premium rate of AH shares,it can be found that the fluctuation of any single capital market and the fluctuation of the premium rate of AH shares have a non-linear correlation.This phenomenon shows that in addition to the fixed transaction cost difference between capital markets,there are still variable transaction costs that make the premium rate of domestic assets fluctuate continuously.At the same time,this phenomenon has a realistic basis for deriving a new pricing factor.This paper proposes that investors have premium extrapolation beliefs,and differences in the macroeconomic environment will lead to investors’ premium extrapolation behavior,affecting asset returns.The extrapolation of premium can be supported theoretically from two aspects.First,Max Weber believes consumption is not the only factor determining people’s utility.The increase in wealth and social status brought about by wealth growth can also affect the investor’s utility function.Assets are a specific form of wealth.There are different prices for domestic and overseas equity assets of the same quality and rights.Excessive premiums increase uncertainty in asset prices,and asset prices may deviate significantly from intrinsic values.The premium level of homogeneous assets becomes an uncertain risk to existing asset prices,which will cause investors to extrapolate premiums based on rational behavioral thinking;Second,psychology believes that people often have irrational beliefs that overreact or underreact to events—extrapolated beliefs.At present,the measurement of the impact of extrapolated beliefs is to observe the cumulative changes of asset prices or fundamentals in the past few periods from the perspective of time series to judge the direction of asset price changes in the next period based on the positive or negative of the accumulated values.This paper argues that investors also have horizontal extrapolation beliefs.The influence of extrapolation beliefs not only exists in the vertical dimension of the time series but also the direct premium phenomenon of homogeneous assets between horizontal markets and the changes in the macroeconomic environment differences between capital markets that can affect asset prices will cause premium extrapolation of asset prices Influence.The reason for the influence of this horizontal premium extrapolation belief is not only the overreaction and underreaction caused by the relevant variables on the cross-section of the same period but also the rational behavioral response based on the uncertainty risk compensation based on the difference in the macroeconomic environment and the expected judgment of the difference in valuation level.In addition to the influence of the belief in direct premium extrapolation caused by the continuous rise of direct premium variables,during a particular stage of the macroeconomic cycle,the direction of economic policy has continuity,such as monetary policy entering a cycle of interest rate hikes or cuts,and monetary policy cannot turn in the short term.The same macroeconomic variable has gradually widened the gap between domestic and overseas.In particular,the capital market under domestic capital control is divided from the overseas capital market,and the monetary policy is relatively independent.After the monetary policy enters the easing cycle,assets will be given higher valuations,and the price difference between domestic and overseas prices of homogeneous assets will expand.The increasing cost and difficulty of maintaining differences in the macroeconomic environment have made policies unsustainable.The rising differences in the macroeconomic environment have also prompted investors to form potential extrapolation beliefs.It is expected that future domestic macroeconomic policies will reduce the differences in the macroeconomic environment.The differences mentioned above in the macroeconomic environment can also explain that after the limited opening of the domestic capital market in China,foreign funds have continued to purchase A shares of AH shares dual-listed companies at a relatively premium valuation through channels such as Shanghai-Hong Kong Stock Connect.After the diversification of investors in the domestic capital market,investors have non-consistent goals.The required pricing factors become more complicated,and this phenomenon,similar to the Peso Problem,has existed for a long time.Repeated historical facts can promote the formation and consolidation of investors’ premium extrapolation beliefs and enable investors to make timely premium extrapolation decisions that conform to behavioral rationality after observing premium information.The research focus of this paper is that under China’s domestic capital account management system,due to the premium phenomenon of AH shares as a representative of homogeneous assets and the differences in the macroeconomic environment of the capital markets of AH shares,investors are prompted to extrapolate the premium,thus impact on asset pricing.In the theoretical research,a simple financial market model constructs to find out the fundamental variables of the macroeconomic environment that can lead to the generation of homogeneous asset premiums as the indirect premium variables that lead to the extrapolation of investor premiums.By introducing the comprehensive index variable of macroeconomic environment difference that can make premium extrapolation belief investors produce premium extrapolation behavior,expanding the consumer capital asset pricing model(CCAPM)’s investor utility function under the general equilibrium framework,it can explain the impact of the premium effect on asset prices,including the direct premium of assets and the difference in the macroeconomic environment,and improve the applicability of capital asset pricing theory in China.In the part of empirical research,through empirical research methods such as the VAR model and variance decomposition,find the direct premium variables and potential premium variables that constitute the premium of homogeneous assets.Using these essential premium variables to construct a macroeconomic environment difference index that can lead to asset premiums through principal component analysis and partial least squares,and empirical methods such as the DCC-GARCH model,it proved that the difference in the macroeconomic environment is related to the fluctuation of the capital market,and find the extrapolation of premium in the capital market.By establishing a multi-factor model(ZPrem-FF3)with premium extrapolation risk factors,empirically test the relevant inferences derived from the capital asset pricing theory model with premium extrapolation beliefs,and evaluate the explanatory efficiency of the model.In the ZPrem-FF3 factor model empirical research and efficiency evaluation research,it can find that premium extrapolation risk factors have good explanatory power for portfolio returns.Use GRS statistics and other test methods to evaluate the efficiency in the comparative analysis of empirical efficiency with other multi-factor models.The results show that the ZPrem-FF3 factor model has a significant advantage in explaining the return of investment portfolios with premium extrapolation risks.